CEMEX HOLD (2/17/09) CURRENT PRICE: US$7.05/M$10.50 TARGET PRICE: US$8.00/M$11.00

Transcription

1 Latin American Equity Research Mexico City, February 17, 2009 CEMEX Company Report Mexico Cement & Construction The Long and Winding Road Lowering Target and Reiterating Hold Gonzalo Fernández* Mexico: Banco Santander S.A. (52 55) (2/17/09) CURRENT PRICE: US$7.05/M$10.50 TARGET PRICE: US$8.00/M$11.00 What s Changed Rating: Unchanged at Hold Price Target (US$): From 9.00 to 8.00 EBITDA Estimates 09 from 4.64 to 3.49 (US$ Billion): 10 from 5.10 to 3.65 Company Statistics Bloomberg CX 52-Week Range (US$/ADR) E P/E Rel. to the IPC Index (x) E P/E Rel to Cement (x) 5.36 Mexico IPC Index (US$) 1,290 3-Yr EBITDA CAGR (07-10E) -7% Market Capitalization (US$ Mn) 5,481 Float (%) 67 3-Mth Avg. Daily Vol. (US$ Million) 95.9 Shares Outst. Mn (ADR:10:1) 7,774 Net Debt/Equity (x) 1.44 Book Value per ADR (US$) Estimates and Valuation Ratios E 2009E 2010E Net Earn (M$ Mn) 26,108 2,278 5,215 9,064 Current EPS Net Earn (US$ Mn) 2, Current EPADR P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) Div per ADR (US$) Div Yield (%) Sources: Bloomberg, Company reports, and Santander estimates. HOLD Investment Thesis: We are lowering our estimates for Cemex, following changes in our macroeconomic forecasts (primarily GDP growth and exchange rate assumptions) and including the guidance the company provided at its annual meeting with analysts on February 4 (Cemex Day 2009). As a result of the downward revision in our estimates, we are lowering our YE09 target price from US$9.00 per ADR to US$8.00 (M$11.00 per CPO). However, after the recent sharp correction in the stock price we are maintaining our Hold rating. Reasons for Changes to Rating and Estimates: We are lowering our EBITDA estimate for 2009 from US$4.6 billion to US$3.5 billion, reflecting the weaker-than-expected volume guidance disclosed during Cemex Day and the strong appreciation of the U.S. dollar vs. the Mexican peso and the European currencies. In addition, we estimate a net FCF of US$1.5 billion, below Cemex management s guidance for US$1.9 billion US$2.0 billion. Cemex management stated it will use most of its FCF, plus asset sales estimated at US$1.7 billion-us$1.9 billion, to reduce total debt by US$3.6 billion during However, because of the uncertainty about which assets could be sold, their valuation, and EBITDA related to these assets, we are not including the future sale of assets in our estimates at this point, only those finalized in 2008 (Austria and Hungary). A successful sale of assets without a significant negative impact of future EBITDA is the main upside risk to our Hold rating, in our opinion. We regard Cemex s progress in refinancing its debt in 4Q08 as a significant positive. Nevertheless, it still has debt maturities of close to US$4.0 billion per year in 2009 and 2010, and close to US$8.0 billion in 2010, well above Cemex s estimated FCF. As a result, Cemex has to continue working on refinancing to extend these maturities, and this could imply a higher cost of financing. Valuation and Risks: Our YE09 target price is based on a DCF valuation using a discount rate of 9.5% and a 1.0% terminal growth rate, and indicates a target FV/EBITDA of 5.7 times for Our target price implies moderate potential upside of 13% from current levels, slightly above our benchmark of 10%, thus we are maintaining our Hold rating. Risks include: a worse-than-expected impact of the subprime lending crisis on the U.S., Mexican, and European construction markets; changes in economic conditions in Cemex s markets, changes in exchange and/or interest rates; refinancing risk; and derivative losses. The main upside risk to our Hold rating is a successful sale of assets that could result in a higher-than-expected reduction in debt without a proportional negative impact on EBITDA and FCF. * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules.

2 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold Cemex is the third-largest cement producer in the world, with 80 million metric tons per year of cement production capacity and 456 ready-mix concrete plants. The company is engaged in the production, distribution, marketing, and sale of cement, ready-mix concrete, aggregates, and clinker. Cemex has operations and is the market leader in Mexico, the U.S., Spain, Venezuela, the Philippines, Colombia, Puerto Rico, and Egypt. It also has a significant presence in Central America and the Caribbean, Indonesia, and Thailand. In June 2007, Cemex completed the acquisition of Rinker, the Australian cement producer, for a total firm value of US$15.3 billion. Rinker generates 80% of its revenue in the U.S. and the remainder in Australia. GLOBAL ECONOMIC OUTLOOK AND THE U.S. STIMULUS PLAN The economic outlook for most of the main regions in which Cemex operates continues to be gloomy, with significant contractions in GDP and industrial output in the U.S., Mexico, Spain, Germany and France, among others, and, in some cases, even deeper contractions in the housing and construction sectors. In our opinion, the only country where construction could perform better than the overall economy is Mexico, mainly because the government is aggressively using infrastructure investment and the housing program as measures to stimulate the economy. Figure 1. Mexico and U.S. Industrial Production (YoY Growth) Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 US (industrial) Mex (manufacturing) Source: Santander. Figure 2. Euro Zone GDP Growth (YoY Growth) Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 UK France Germany Spain Source: Bloomberg. 2

3 U.S. STIMULUS PLAN On Friday, February 17, President Obama announced a US$767 billion economic stimulus plan. The main elements of the final version are: (1) US$507 billion in spending programs, including US$150 billion in infrastructure projects and US$87 billion in aid to individual states to help pay for Medicaid; and (2) US$282 billion in tax cuts, including tax credits of US$400 or US$800 for households in certain income bands. In our opinion, the approval of additional infrastructure spending could raise expectations of increased construction activity and higher demand for cement. However, in the opinion of the Portland Cement Association of the U.S. (PCA) and the economic research firm Macroeconomic Advisers, this stimulus program is unlikely to have a positive impact on construction activity and cement consumption until 2010 or According to a report published by Macroeconomic Advisers, the Congressional Budget Office (CBO) based on its analysis of historical experience, estimates that the appropriations included in that bill cannot be spent as fast as the Obama Administration would like. In particular, the CBO argues that: New government programs cannot be established, staffed, funded, and implemented quickly. A quantum increase in funding for an existing program might even slow the typical spendout rate, since administrators of such programs may not have the capacity to expand the programs rapidly. Regarding infrastructure spending: it takes time to conduct environmental impact studies, collect bids, contract out the work, and then execute it. President Obama is also expected to launch a program this week to support the housing industry, which would initially focus on halting foreclosures in order to stop the sharp decline in house prices. In our opinion, this would be a very positive initial step; however, in order to see a resumption of new housing construction, we first need to see accumulated inventories beginning to decline and a recovery in buyers purchasing power, which, in our opinion, is unlikely to happen before As a result of these factors, we would be cautious about expecting these measures to have an impact in the short term, but we confirm our view that they should have a positive impact on construction activity and cement consumption by U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold ADJUSTING OUR EARNINGS OUTLOOK After incorporating changes in our macroeconomic outlook into our model, as well as the guidance provided by the company during its Cemex Day meeting with analysts on February 4, we are lowering our EBITDA estimate for 2009 from US$4.6 billion to US$3.5 billion (at the low end of the company s guidance of US$3.5 billion-us$3.7 billion) and from US$5.1 billion to US$3.7 billion in Figure 3. Estimate Revisions, E (US Dollars in Millions) E 2010E Santander E Reported Change Previous Current Change% Previous Current Change% Revenue 22,954 22, % 22,335 17, % 24,046 17, % Op. Profit 2,944 2, % 3,219 1, % 3,685 2, % Op. Margin 12.80% 11.6% -1.2% 14.40% 11.2% -3.2% 15.30% 12.5% -2.8% EBITDA 4,720 4, % 4,639 3, % 5,104 3, % Net Income % 1, % 1,785 EPADR % % 2.14 Sources: Company Reports and Santander estimates % -63.3% NEGATIVE IMPACT OF FX RATES The significant change in our estimates is partially explained by the change in our macroeconomic outlook for Mexico. Since our last report on Cemex on November 3, 2008, our economists have reduced their GDP growth forecast for Mexico from a positive 1.5% to a negative 1.6%. In addition, our forecast for a year-end 2009 peso/dollar exchange rate was revised from M$12.00/US$ to M$13.70/US$ and from M$12.50/US$ to M$13.52/US$ for In the opinion of our European economists, the weakness in the British pound and the euro should continue during 2009; they forecast year-end exchange rates of /US$1.20 and /US$1.10, which would affect revenue in U.S. dollar terms of Cemex s operations in Spain, the UK, and other countries in Europe. Cemex management agrees that the strength of the U.S. dollar should continue and will have a negative impact on 2009 results, estimating a negative FX impact of US$650 million on EBITDA in full-year Figure 4. Mexico Select Economic Projections, E E 2009E 2010E Real GDP (%) 3.2% 1.3% -1.6% 1.8% CPI Inflation (%) 3.8% 6.5% 4.3% 3.9% US$ Exchange Rate (Year-End) US$ Exchange Rate (Average) Interest Rate (Year-End) 7.4% 8.0% 6.5% 6.8% Interest Rate (Average) 7.2% 7.7% 6.8% 6.5% Fiscal Balance (% of GDP) 0.0% 0.0% 0.0% NA Current Account Balance (% of GDP) -1.2% -1.5% -1.6% NA International Reserves (US$ Bn) NA Total External Debt (% of GDP) 12.8% 12.1% 11.5% NA Source: Santander historical and forecasts. NA not available 4

5 CONTINUED WEAKNESS IN VOLUME As a result of the downward revision in our GDP growth estimate for Mexico, we have revised our volume growth estimates for Mexico for 2009 from a positive 1.5% to a negative 4.1%, and ready-mix volume growth from a gain of 3.1% to a decline of 3.8%. While we continue to believe that housing and infrastructure investment will be the cornerstone of the government efforts to moderate the impact of the U.S. recession on Mexico, in our opinion, the overall lower economic activity should affect cement consumption during In addition to the weaker currencies, the global economic slowdown and the crisis in the housing industry continue affecting cement consumption in Cemex s main markets. As a result, we lowered our cement volume growth estimate for Cemex s operations in the U.S. from a decline of 7% to a drop of 15% and from -11.0% to -20% in the company s operations in Spain. In the UK, we maintain our estimate for a decline of 8%. In the case of ready mix, we forecast contractions for Cemex of 20% in the U.S., 32% in Spain and 10% in the UK. These volume estimates are in line with the company guidance disclosed on February 4. CEMEX COUNTING ON PRICE INCREASES AN AGGRESSIVE MOVE, IN OUR OPINION During its annual meeting with analysts, Cemex s management reiterated its intention to increase prices in local terms in most of its markets to reflect the depreciation of local currencies and the higher cost of capital. On February 3, Cemex announced an 8% increase in prices in Mexico, following the 6% increase applied in October. The company also announced price increases of US$15 per short ton of cement and US$25 per cubic yard of ready mix applied in January Our price estimates are more conservative, given the sharp drop in volume expected for 2009, lower purchasing power, and the significant drop in energy and transportation prices that, in our opinion, do not justify such aggressive price increases. Furthermore, cement imports into the U.S. which can act as a buffer for price contractions, have decreased from 25% of total consumption in the U.S. in 2006 to 11% in 2008 and is expected to drop to 5% according to the Portland Cement Association of the U.S. In some areas that are suffering more from the drop in cement demand, such as Florida, imports are expected to decline to close to zero. As a result, the pressure is likely to shift to domestic producers working at low capacity utilization and, thus, forced to reduce prices. In coastal areas such as Florida and California, high prices coupled with low freight costs could be an incentive for importers to renew cement imports at lower prices. As a result, we estimate, in local currency, a 6% price hike in Mexico, a 5% increase in the U.S., 3% in the UK, and flat prices in Spain, below Cemex s price guidance. For detailed information of our estimated volume and prices, please see the tables at the end of this report. Cemex estimates that cost-cutting efforts implemented by the company since 2008 and lower energy costs should imply savings of US$700 million in This saving should be partially offset by the significant decrease in volumes forecasted for As a result, we estimate that Cemex s EBITDA margin could increase from 20.0% in 2008 to 20.5%in Nevertheless we expect a 21% contraction in EBITDA in full-year 2009 in U.S. dollar terms. OUR ESTIMATE OF FCF AND DEBT REDUCTION IS LOWER THAN THE COMPANY S GUIDANCE Management estimates that Cemex could generate enough FCF to reduce debt by between US$1.7 billion to US$1.9 billion in This estimate is based on management s forecast of EBITDA of US$3.5 billion to US$3.7 billion for 2009; net financial expenses of US$1.0 billion; U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold a reduction in capex (for maintenance and expansion) from US$2.1 billion in 2008 to US$650 million in 2009; US$500 million in taxes, and the proceeds from sales of assets in Hungary and Austria for US$350 million. This forecast does not consider investment in working capital and cash expenses related to losses in derivatives, which have been recurrent in the past. Considering our estimated EBITDA of US$3.5 billion, and assumptions similar to the company guidance, we estimate a free cash flow of US$1.4 billion for this year, 60% below the US$2.6 billion generated in 2008, and a similar reduction in net debt. Our estimated FCF included the US$350 million proceeds from the sale of assets in Austria and Hungary, but we are not considering additional asset sales. With our estimated reduction in debt, Cemex s net debt/ebitda ratio (considering perpetual bonds as debt) would increase from 4.5x in 2008 to 5.3x in 2009 and would decrease only marginally to 4.7x in In our opinion, this leverage is still high; thus, we do not expect rating agencies to upgrade Cemex s debt back to investment grade in the near term. In addition, we forecast that interest coverage should still remain at a healthy 3.2x by the end of Figure 5. Cemex - FCF Calculation, E (US Dollars in Millions) E 2010E EBITDA 4,586 4,343 3,487 3,658 Net Interest Expense , Maintenance Capital Expenditures Increase (Decrease) In Working Capital Taxes & Other Cash Expenses Free Cash Flow (a) 2,578 2,600 1,421 1,655 Expansion Capex 1,435 1, * 300 Funds Available to reduce debt 1,143 1,040 1,481 1,355 Net Debt (including perpetuals) 22,070 19,868 18,387 17,032 NET DEBT/EBITDA (X) Sources: Company Reports and Santander estimates. * Expansion capex net of proceeds from sale of operations in Austria and Hungary in

7 VALUATION Our YE09 target price is based on a DCF valuation, with a discount rate of 9.5% and a 1.0% terminal growth rate, and indicates a target FV/EBITDA of 5.7 times for Our target price implies a moderate potential upside of 13% from current levels, slightly above our benchmark of 10% for a Hold rating, thus we are maintaining our Hold rating. With the stock currently trading at an estimated 2009 FV/EBITDA of 7.3x and a P/E of 15.7x, we regard Cemex s stock as being close to fairly valued. On a P/BV basis, Cemex is trading at 0.49x However, given the volatility observed in foreign exchange losses and losses in derivatives during the second half of 2008, as well as the potential of an additional write-off of goodwill, we believe that there is further downside risk on equity and, thus, in the P/BV ratio. Our estimated cost of capital is based on an average cost of debt of 7.0% (see our assumptions in the following section of this report); a risk-free rate of 2.5%, a country risk premium of 300 basis points for Mexico; a beta of 1.43x, and a debt/equity ratio of 1.36x. Figure 6. Cemex Free Cash Flow, 2010E-2019E (U.S. Dollars in Millions) 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Terminal EBITDA 3,658 3,932 4,129 4,335 4,509 4,689 4,830 4,975 5,124 5,226 Cash Taxes ,161 1,256 1,293 1,383 1,490 Capex ,026 1,056 1,088 1,121 1,143 Changes in Working Capital & Other Cash expenses Free Cash Flow 2,344 2,323 2,315 2,301 2,258 2,207 2,214 2,280 2,298 2,265 26,712 Source: Santander estimates. Figure 7. Cemex Discounted FCF, 2010E-2019E (U.S. Dollars in Millions*) 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Terminal Present Value 2,344 2,323 2,315 2,301 2,258 2,207 2,214 2,280 2,298 2,265 26,712 Firm Value 25,173 Net debt 18,387 Minority Interest 596 Equity Value 6,189 Target Price 8.00 Current Price 7.05 Upside 13% * Except per ADR prices. Source: Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold DEBT REFINANCING A GOOD INITIAL STEP, BUT STILL NOT ENOUGH In its January 28 press release, Cemex announced that it had completed debt-refinancing for US$4.0 billion, extending maturities from 2009 and 2010 to The main points of the refinancing plan included the following: US$2.3 billion dollars of short-term bilateral facilities originally scheduled to mature in 2009 and early 2010 were refinanced in two long-term syndicated facilities. The new maturities comprise US$607 million to be amortized in 2009, US$536 million in 2010, and a final maturity of US$1.15 billion in Cemex extended US$1.7 billion of the US$3 billion syndicated loan facility originally due in December 2009 to December Cemex amended and increased, among other terms, the leverage ratio provisions in its existing syndicated facilities in December The new leverage ratio requirement is a net debt of no more than 4.5 times the trailing 12-month EBITDA as of December 31, 2008, which will increase to 4.75 times in June 30, 2009, before gradually decreasing to 3.5 times by September 30, 2011 and thereafter. The average financial cost of the restructured debt was not announced in the press release. In our opinion, this was positive news for Cemex, as the company was able to extend the maturities of US$4.0 billion of its debt in difficult credit market conditions. Nevertheless, during Cemex Day, Cemex CFO Rodrigo Treviño disclosed that Cemex s debt maturities after this refinancing should be close to US$4.0 billion per year in 2009 and 2010 and US$7.8 billion in 2011, still above the company s estimated FCF generation of US$2.0 billion per year, on average. Therefore, we would expect the company to rely heavily on asset sales and further extension of maturities in order to service its debt. Given that debt maturities decrease significantly after 2010, we believe that there is a high probability that Cemex would continue being successful in extending its debt maturities beyond 2010, although at a higher financial cost. If the company does not succeed in selling assets we do not rule out a potential capital increase in order to service debt. Because 77% of Cemex s debt is represented by bank debt and syndicated loans, in our opinion, banks should continue to be willing to extend maturities, however, at a higher cost and with higher guarantees. In our opinion, banks could continue to request that Cemex convert perpetual bonds for term debt as part of the conditions of the debt-refinancing, as was the case during the last negotiation. 8

9 Figure 8. Cemex Debt Maturity Profile AFTER Refinancing (U.S. Dollars in Millions) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Maturities FCF Sources: Cemex and Santander estimates. Figure 9 Cemex Composition of Debt by Source and Currency as of December 2008 Mexican Capital Markets 11% International Cap markets 8% International Private Placements 4% Euros 24% US Dollars 66% Source: Cemex. Bank Debt 77% Mexican Pesos 10% EXTENDING DEBT MATURITIES, BUT AT WHAT COST? One of our main concerns about Cemex s debt-refinancing was the potential increase in the cost of debt, given the tighter conditions of the financial markets. According to our calculations, Cemex s average cost of debt during 2008 was 4.9%, before including the cost of derivatives. During Cemex Day, CFO Treviño estimated that Cemex s cost of debt for 2009 should be 5.7% before the use of derivatives and 5.5% after including derivatives, considering the current levels of reference rates and the spreads paid by the company. This calculation suggest only a modest increase in Cemex s cost of debt, despite tighter debt markets, the loss of Cemex s investment-grade rating, and high refinancing requirements. Therefore, we believe that this calculation has an upside risk; and we are thus using an average cost of debt of 7.0% in our cost of capital calculation and our cost of debt estimates. According to Mr. Treviño, Cemex s cost of debt was calculated using current levels of reference rates (mainly LIBOR) and the current yield curves. However, because 61% of Cemex s debt is at floating rates, there is risk of an increase in the company s cost of debt if reference rates rise going forward. Cemex sets floors and caps to its LIBOR reference rates through the use of derivatives. However, since Cemex has practically stopped swapping pesodenominated debt for dollars or euros through derivatives, the company now has to pay the Mexican rate on its peso-denominated debt, which costs more. Finally, based on similar transactions in the Mexican debt market and international debt issues by Pemex and the Mexican U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

10 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold Government, we estimate that Cemex s debt spread has increased from 50 basis points over LIBOR by the beginning of 2008 to 250 basis points currently. We are incorporating the increase in this spread into our estimated cost of debt increasing from 4.9% in 2008 to 7.0% in If the company succeeds in maintaining its cost of debt at 5.5%, this would have a positive impact on our DCF valuation. Figure 10. Cemex Cost of Debt Calculation Holding Co. + New Sunward 6.6% US Dollars 4.5% Mexican Pesos 10.6% Perpetuals USD 6.6% Perpetuals Euros 6.3% Cemex Spain 5.0% US Dollars 4.8% Euros 5.3% Other 3.4% Total Cost Before Derivatives 5.7% Total Cost After Derivatives 5.5% Source: Cemex Figure Month LIBOR J-06 A-06 O-06 D-06 F-07 A-07 J-07 A-07 O-07 D-07 F-08 A-08 J-08 A-08 O-08 D-08 F-09 Source: Santander. OUR COST OF DEBT CALCULATION Up until now, Cemex has been able to extend maturities of its banking debt and continue rolling over part of its peso-denominated commercial paper, using, in some cases, the guarantees provided by Mexican development bank Nafinsa, thereby not yet incurring a significant increase in its cost of debt. However, in our opinion, Mexican and international capital markets, which represent close to 20% of Cemex s debt, provide a better sense of Cemex s potential cost of debt in the current circumstances. Cemex s peso-denominated debt in the Mexican capital markets represents 11% of total debt, as of December Average rates for commercial paper in Mexico have increased from 7.9% in January 2008, when the average spread was zero, to 10.5% in January 2009, with an average 190-basis-point spread. Cemex s yield on issues of commercial paper in Mexico has increased from 7.60% in January 2008 to 12.6% in February 2009 with the spread over TIIE (Mexico s reference rate) increasing from -31 basis points to 466 basis points in the same period. In the past, Cemex was able to swap 10

11 peso-denominated debt for U.S. dollars, euros, or other currencies through foreign exchange swaps, thus being able to access lower international rates. However, management decided to close most of its forex derivative positions due to the high risk, given the current high volatility in exchange rates. As a result, going forward, Cemex will pay the full rate for peso-denominated debt. Based on recent transactions, we estimate that Cemex s cost of debt in the Mexican market will be 10.5% during Figure 12. Average Rates and Spreads of Commercial Paper Issues in Mexico J 08 F M A M J J A S O N D J 09 Avg Rate Mexico Avg Spread Source: Santander Figure 13. Cemex - Issues of Commercial Paper in Mexico ISSUE AMOUNT (MILLION M$) DATE YIELD SPREAD TIIE 28 TERM (DAYS) CEMEX Jan CEMEX Feb CEMEX Mar CEMEX Apr CEMEX May CEMEX Jun CEMEX Jun CEMEX Aug CEMEX Sept CEMEX Oct CEMEX Oct CEMEX Oct CEMEX Oct CEMEX Nov CEMEX Nov CEMEX Nov CEMEX Dec CEMEX Dec CEMEX Jan CEMEX Jan CEMEX Jan CEMEX Feb CEMEX Feb Sources: Company reports and Santander. Regarding U.S. dollar-denominated bonds, Cemex has four long-term bonds outstanding, three perpetual bonds and one bond maturing in October 2009, with a weighted average yield of 14.4%. As a reference, Mexico sovereign bonds have an average yield of 7.13%, and a U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

12 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold sample of Pemex s bonds has a weighted average of 9.29%, with the latest issue paying a coupon of 8.5%. In our opinion, a successful restructuring of Cemex s debt should include sooner or later accessing the bond market, as Cemex cannot fully rely on banking debt, and banks are unlikely to feel comfortable carrying all of Cemex s debt. Based on Figure 14 on the following page, our estimated cost of debt for Cemex in the international capital markets is 10%. Figure 13. Cemex, Mexico and Pemex - International Bond Yields Instrument Maturity or Call Current Yield Issue Size Cemex 9.625% 09 10/ % 190 Cemex 6.196% Perpetual 12/ % 350 Cemex 6.64% 14 Perpetual 12/ % 750 Cemex 6.722% 16 Perpetual 12/ % 900 Weighted Average Cemex 14.41% 2190 Mexico Sovereign Bonds UMS10 01/ % UMS11 01/ % UMS12 01/ % UMS13 01/ % UMS14 01/ % Simple Average Mexico 7.13% Pemex 9.125% 10 10/ % 553 Pemex 8% 11 12/ % 182 Pemex FRN 12 12/ % 687 Pemex 7.375% 14 12/ % 900 Pemex 7.75% 49 Perpetual 09/ % 1740 Weighted Average Pemex 12/ % 4062 Source: Santander. Based on the above-mentioned assumptions, our estimated cost of debt for our DCF model is 7.0%, assuming Cemex s current average cost of 5.7% for its banking debt, 10.5% for issues of commercial paper in Mexico, and 12% for issues of bonds in international markets. Our cost-of-debt calculation assumes that Cemex maintains its current debt structure. However, if banks require the company to refinance banking debt with bond issues, the cost could be higher. Figure 14. Cemex - Cost of Debt as Estimated by Santander Rate % of Total Weighted Rate Bank Debt 5.7% 77% 4.4% Mexican Capital Markets 10.5% 11% 1.2% International Capital Markets 12.0% 12% 1.4% Total 100% 7.0% Source: Santander estimates. CEMEX IS LOWERING ITS EXPOSURE TO DERIVATIVES Since the beginning of the market volatility in 3Q08, Cemex has reduced its notional amount of derivatives from US$24.66 billion in September 2008 to US$17.8 billion as of December The most aggressive reduction was in foreign exchange swaps (mainly pesodenominated debt to U.S. dollars or euros), which decreased from US$8.8 billion to US$1.3 12

13 billion in the same period. We estimate that the company had cash losses of US$900 million in 4Q08 related to the closing of its derivative positions. However, management said that the company has closed 88% of its exposure to equity derivatives linked to Cemex and Axtel stock prices and to foreign exchange rates, thus significantly reducing the possibility of margin calls and cash losses. On the other hand, Cemex has increased its interest rate derivatives in order to establish caps and floors to its variable rate debt. In our opinion, it is a significant positive that the company has reduced its exposure to derivatives due to the high financial risk that this represented because of the high volatility in the financial markets. On the negative side, that Cemex stopped swapping peso-denominated debt for debt in hard currencies should result in a higher average cost of debt, in our opinion. Figure 15. Cemex Notional Amounts of Derivative Operations (in Millions of U.S. Dollars) Notional Amounts Sept. 30, 2008 Oct. 14, 2008 December 2008 Equity Derivatives Forex 8,774 5,231 1,293 Interest Rate Derivatives 14,928 14,925 15,701 Total 24,664 21,119 17,792 Estimated Aggregate Fair Value Difference Sources: Cemex and Santander. The four main types of derivatives Cemex uses are as follows: (1) Equity forward contracts and derivatives on Cemex s stock. These are used to hedge future exercises of options under the executive stock option programs. Negative movements in Cemex s stock price generate losses in mark-to-market on equity derivatives. Cemex also has equity derivatives related to its perpetual bonds and a capital hedge program, which resulted in a US$300 million cash gain in 3Q08 that was used to reduce debt. (2) Forward contract on Axtel stock. On March 31, 2008, Cemex sold 119 million shares of telecommunications company Axtel, or 9.5% of the equity capital of this company, for approximately US$257 million. However, Cemex entered into a three-year forward contract on the equivalent number of Axtel s shares, which would allow Cemex to benefit from future stock appreciation but also participate on the downside. Axtel s stock price has fallen more than 70% from March 3, 2008, to date; as a result, Cemex has registered negative mark-tomarket of this contract in its quarterly results. Losses in financial operations of US$271 million reported in 3Q08 were due to the reduction in Cemex and Axtel s stock prices and losses on forex derivatives as explained below. In our opinion, hedging Cemex s stock options program has its logic; however, keeping the upside or downside risk on Axtel stock price after selling it, makes no sense for Cemex and its shareholders. Nevertheless, considering the sharp drop in Axtel s stock price, we expect lower downside in mark-to-market going forward. (3) Currency swap contracts. Through these contracts, Cemex swaps the exchange and interest rates of a determined amount of debt. Movements in exchange rates affect the mark-to-market of these instruments. The main use of these contracts is to swap peso-denominated debt for U.S. dollars and euros in order to obtain lower interest rates and align debt with Cemex s mix of revenue (dollars, euros, and pesos). Cemex has used the currency-swap strategy since Nevertheless, because of the strong volatility of the peso/dollar exchange rate which went from M$9.85/US$ on August 4 to a maximum of M$13.21 on October 9 and to M$12.83 on October 16 Cemex has posted significant negative mark-to-market on its peso/dollar derivatives and cash costs, due to the closing of the contracts and margin calls. The US$711 million negative mark-to-market reported as of October 14 includes a US$366-million loss due to the closing of forex derivatives on a notional amount of US$2.9 billion, which has no further downside. (4) Interest rate swaps. With these instruments, Cemex exchanges rates between peso- and U.S. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

14 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold dollar-denominated debt to LIBOR, Euribor, and other currency-denominated debt. As of September 2008, derivatives on interest rates included US$14.1 billion in dollar-denominated debt and US$3.8 billion in euros. Cemex has 75% of its debt at variable rates with caps. However, given the sharp increase in LIBOR and Euribor over the last few months, Cemex increased its derivatives on interest rates from US$7.2 billion as of June 2008 to US$15.0 billion as of September, Cemex hedged US$8.5 billion of debt at a maximum LIBOR rate of 3.5% and US$2.4 billion at a Euribor rate of 4.2%, and fixed the interest rate of US$3.0 billion in debt at 3.0%. Cemex also hedged rates for US$1.3-billion yen-denominated debt. We conclude that Cemex s derivatives program helped the company in the past to reduce its cost of debt in order to finance its acquisitions at a lower cost, align its debt to its revenue mix in terms of currencies, and protect its equity. Nevertheless, recent examples in Mexico have demonstrated the high risk for companies of the use of derivatives during times of high volatility in the financial markets. In our view, Cemex s ongoing reduction of the exposure to derivatives will reduce this risk in the future. Further changes in exchange rates could increase losses in derivatives and cash costs for Cemex: the appreciation of the peso would reduce the negative mark-to-market. In our opinion, the reduction in exposure to derivatives would result in a less complicated and risky financial structure. On the flip side, this would imply a higher cost of financing for Cemex. ASSET SALES KEY TO REDUCING LEVERAGE Since 2008, Cemex management set an aggressive target of selling assets in the range of US$1.7 billion to US$1.9 billion and has been using the proceeds to reduce debt. If successful, we estimate that these sales along with the expected FCF generation would allow the company to reduce debt by a total of US$3.6 billion during 2009, taking the net debt/ebitda ratio (excluding perpetual bonds) from 4.0x by December 2008 to 4.1x to 4.4x by December 2009, allowing Cemex to pay most of its debt maturing in During Cemex Day, management did not disclose the potential region or type of assets for sale. Nevertheless CEO Lorenzo Zambrano showed confidence in completing this sale through the year, noting that negotiations with potential buyers are advancing well. Mr. Zambrano did not rule out any region or business line to be potentially sold, but he said that it is his intention to change the balance of the company toward a bigger presence in the cement business and reduce the company s exposure to ready mix, aggregates, and other construction materials. In our opinion, a sale of assets at a reasonable valuation seems difficult during these times, given: the weakness of the construction industry in most of the regions where Cemex operates; the financial weakness of global cement producers; limited access to financing; and higher cost of capital. However, a successful sale of assets without a major reduction in EBITDA is the main upside risk to our Hold rating on Cemex. We are not including proceeds of asset sales apart from operations in Austria and Hungary in our model, because we cannot estimate the potential EBITDA generated from these assets that would have to be deducted from our DCF valuation. We will include this effect once the details for the asset sold are disclosed. WHICH ASSETS COULD BE SOLD? Operations completed: On July 31, 2008 Cemex announced in a press release that it has reached an agreement to sell its Austrian and Hungarian operations to Strabag S.E., one of Europe s leading construction and building materials groups, for 310 million (approximately US$350 million). We note that on February 16, 2009, Hungary s antitrust authorities approved 14

15 Cemex s sale of assets in that country to Strabag S.E. The Hungarian assets are comprised of five aggregate plants (1.8 million metric tons of volume sold in 2007), 31 ready-mix plants (0.8 million cubic meters of volume sold in 2007) and five paving-stone plants. Revenue in 2007 from these assets was approximately US$84 million. The sale of the Austrian assets is still pending authorization from the European antitrust authorities, but completion is expected during the first half of Proceeds from this sale are already included in our estimates for On December 29, 2008, Cemex announced that it had completed the sale of its Canary Islands operations to several Spanish subsidiaries of Cimpor Cimentos de Portugal for 162 million (approximately US$226.8 million). Proceeds from the sale were received during 4Q08 and used to reduce debt Potential operations announced: Potential compensation from the nationalization of Cemex Venezuela. During August 2008, the Venezuelan government determined to nationalize the cement assess of Cemex, Lafarge, and Holcim in that country. After this decision, Cemex determined that it could not accept the compensation proposal offered by the government of Venezuela, as it believed that the offer of US$650 million for its 76% stake in Cemex Venezuela (US$855 million for 100% of the company) significantly undervalues its business in Venezuela, and the compensation is significantly below the compensation offered to its global competitors. As a result, Cemex announced its decision to seek international arbitration before the International Center for Settlement of Investment Disputes. Under a replacement-value calculation we estimate that the fair value of Cemex s 76% stake in Cemex Venezuela could be in the range of US$660 million-us$840 million. A potential agreement regarding compensation for these assets should result in additional cash flow available to reduce debt. Because the Venezuelan government has not yet paid the compensations to Lafarge and Holcim, which agreed on a compensation amount, and we expect a long legal dispute with Cemex, we are not considering any potential compensation from Venezuela in our estimates. Cemex announced the intention to sell assets in the UK which include the flooring, roof tiles, and rail products businesses, which generated combined sales of approximately US$98 million in No potential amount or date for this sale has been disclosed. On August 6, 2008, Cemex announced that it was exploring the sale of certain assets in Australia. The assets being considered for sale operate under the Humes brand name and consist of 16 concrete pipe and products manufacturing facilities located throughout Australia. Humes sold more than 580,000 tons of product in 2007, generating revenue of approximately A$255 million (US$234 million). According to a report on Bloomberg published on December 26, Cemex is in the process of selling its 20% stake in Trinidad Cement as part of the efforts to sell off non-core assets What else could be sold? In our opinion, the above-mentioned assets announced for sale are not large enough to reach the US$2.0 billion target set by the company. As a consequence, given Cemex s geographical exposure and business segments, we will try to identify assets that the company could consider as non-core and, thus, subject to potential sale. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

16 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold Figure 16. Cemex - Geographical Exposure The Americas Europe and Mediterranean Australia & Asia Pacific Presence in 3 businesses (Cement, Aggregates, Ready-Mix) Presence in 2 businesses Presence in 1 business Source: Cemex. Considering Cemex s geographical exposure and presence in its three main businesses (cement, ready mix, and aggregates), we believe that its core markets are Mexico, Spain, the U.S., and the UK, which together generated 54% of consolidated sales in As a result, by region, Asia (Australia, Philippines, and Thailand 9% of sales), Africa and Middle East (Egypt 5% of sales), the Caribbean (9%), and Rest of Europe (20%) should be considered as non-core regions for Cemex and, thus, could be subject to sale. In our opinion, the most likely countries/regions where assets potentially could be sold are Egypt and Australian, and Asia and the Caribbean. Europe excluding Spain and the UK represented 20% of total sales in Therefore, we believe this region has plenty of assets that potentially could be sold. Cemex has presence on three businesses in Germany and France, however the company does not have a dominant market position in these markets as that is the company s preferred strategy. Thus, in our opinion these assets could be sold to its global competitors based in Europe. After the turnaround in the German operations after the acquisition of RMC, we believe that Cemex could make a good profit in that country. In addition, Cemex has invested in expanding capacity in Poland and Latvia in Eastern Europe, and these are the kind of fast-growing markets that the company likes. Accordingly, we do not believe that it is likely that Cemex will sell assets in these countries. Individual businesses in Italy and the Baltic also can be considered as non-core, in our opinion. In the case of the UK, Cemex has not being successful in turning around its operations there after the acquisition of RMC, with the UK representing 8% of total sales but operating close to breakeven in terms of EBITDA. As a result, we consider that operations in the UK could potentially be sold. However, the low profitability of the business at present would imply a very low valuation, in our opinion. 16

17 Figure 17. Cemex - Sales by Region and Product 2008 Asia 9% Spain 7% Africa and Middle East 5% Eliminations 2% Mexico 18% South CA and Caribbean 9% Rest of Europe 20% UK 8% USA 22% Source: Company reports. During his presentation on Cemex Day, CEO Zambrano stated that Cemex is considering rebalancing its portfolio in terms of developed versus developing regions through these asset sales, and also in terms of businesses, aiming to increase the proportion of the cement business at the expense of ready-mix and aggregates. As a result, we believe that a potential sale of assets in the U.S. should be more focused on business lines rather than regions. During 2007, Cemex was in negotiations with CHR to sell Cemex s assets in the U.S. and Europe for a total value of US$3.5 billion to US$4.5 billion ( 2.5 billion to 3.2 billion). However, on November 30, 2007, Cemex announced that discussions relating to the potential sale of additional operations had been terminated due to disagreement over the value of the assets and that the parties reached an agreement to sell only US$250 million worth of assets requested by the U.S. authorities, In our opinion, talks regarding Cemex selling assets in the U.S. to CRH could be re-opened, However, considering current market and economic conditions, the valuation of these assets could be well below what it was in On February 16, there was a report on Bloomberg CRH was considering the possibility of making a rights offering for 1.0 billion (US$1.28 billion) in order to strengthen its balance sheet for future acquisitions. If confirmed, this could enable CRH to restart conversations with Cemex. We clarify that this discussion of potential sales in regions and businesses is only a theoretical exercise and is not an indication that Cemex has given any sign that it is willing to sell any particular asset.. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

18 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold RISKS In our opinion, the main risk for Cemex at present is the refinancing of debt maturing in the period; Cemex could pay approximately one half of this debt with our estimate of its free cash flow generation. In our opinion, Cemex will be able to gradually extend the maturities of this debt beyond Nevertheless, failure to refinancing this debt could imply significant liquidity issues for the company. Cemex has a significant exposure to derivatives, which poses additional risks of potential negative mark-to-market and cash losses, which could affect Cemex s results going forward. Our estimates assume that cement consumption in the U.S. will remain weak during 2009 and that a recovery should begin in Nevertheless, a larger-than-expected problem in the mortgage market could delay the recovery in the housing market further, or could generate an even bigger contraction in the cement market. A deeper-than-expected correction in European construction markets could have a significant negative impact on Cemex s results. Because of the positive outlook for housing and infrastructure in Mexico, Cemex and its competitors plan a significant expansion in capacity that would add 20% to cement capacity in Mexico by If demand does not increase as expected, the additional capacity could create some pressures on prices. Because the results generated by Rinker after its acquisition in 2007 have been way below expectations there is additional risk of goodwill impairment when the company makes its annual revision of the fair value of goodwill by the end of UPSIDE RISKS TO OUR HOLD RATING INCLUDE: Upside risk to our estimates is a faster-than-expected recovery in the construction industry in the U.S., Europe, and Mexico Cemex stated its intention to continue selling non-strategic assets in order to reduce debt. We are not including any significant sales of non-core assets during 2009 in our estimates, because of the current difficult conditions in the cement market and lack of information regarding EBITDA and FCF generated by these assets. However, if the company succeeds in selling assets and uses a significant amount of the resultant cash to pay down its debt, this could be a positive surprise and a potential catalyst for its stock price. We are also not including in our estimates a potential compensation from the nationalization of Cemex assets in Venezuela. Cemex receiving payment for the nationalization of assets in Venezuela and the use of proceeds to pay down debt would have a positive impact on the stock price and our valuation. A faster and less-costly reduction in the exposure to derivatives, a potential renegotiation of debt maturities without a significant increase in costs, and a stabilization in the financial markets that could allow Cemex to extend its debt maturities at a low cost. All of these events could be positive catalysts for the stock price and could affect our estimates and valuation. In order to be conservative, our revised estimates for 2009 and 2010 do not fully take into account Cemex s estimated cost-savings and reduction in capital expenditures. The achievements of these targets would imply higher EBITDA and FCF generation and could imply upside risk to our estimates and valuation. The company has not released guidance for 2009, and the company estimate could differ from ours. 18

19 OPERATING ESTIMATES Figure 18. Cemex Volumes Estimates, E Domestic Cement ( 000 Tons) E 2010E Mexico 19,181 18,468 17,705 18,329 YoY Growth 4.1% -3.7% -4.1% 3.5% USA 16,153 13,862 11,780 10,956 YoY Growth -7.5% -19.0% -15.0% -7.0% Spain 11,455 7,970 6,376 5,878 YoY Growth -4.7% -30.4% -20.0% -7.8% UK 2,853 2,385 2,197 2,263 YoY Growth 12.0% -16.4% -7.9% 3.0% Rest of Europe 9,678 9,473 8,810 9,074 YoY Growth 4.9% -2.1% -7.0% 3.0% South/Central America & Caribbean 12,021 10,542 7,447 7,820 YoY Growth 7.8% -12.3% -29.4% 5.0% Africa and Middle East 4,697 5,057 5,310 5,522 YoY Growth 7.6% 7.7% 5.0% 4.0% Asia & Australia 3,941 3,871 3,617 3,726 YoY Growth 7.2% -1.8% -6.5% 3.0% Ready Mix ( 000 m 3 ) E 2010E Mexico 13,082 12,331 11,858 12,703 YoY Growth 7.8% -5.7% -3.8% 7.1% USA 16,153 14,178 11,303 10,402 YoY Growth 10.4% -12.2% -20.3% -8.0% Spain 7,160 5,252 3,566 2,545 YoY Growth -3.9% -26.6% -32.1% -28.6% UK 6,048 4,791 4,314 4,925 YoY Growth -1.8% -20.8% -9.9% 14.2% Rest of Europe 20,084 19,905 18,512 19,067 YoY Growth -0.5% -0.9% -7.0% 3.0% South/Central America & Caribbean 5,339 4,828 3,721 3,907 YoY Growth 12.7% -9.6% -22.9% 5.0% Africa and Middle East 6,281 6,246 6,403 6,564 YoY Growth -0.5% -0.6% 2.5% 2.5% Asia & Australia 5,372 8,843 8,270 8,684 YoY Growth 297.3% 64.6% -6.5% 5.0% Aggregates ( 000 Tons) E 2010E Mexico 20,459 23,356 22,455 23,577 YoY Growth 56.9% 14.2% -3.9% 5.0% USA 72,526 70,117 57,414 54,068 YoY Growth 75.1% -3.3% -18.1% 5.0% Spain 15,078 11,200 8,659 6,236 YoY Growth 2.5% -25.7% -22.7% -28.0% UK 27,473 24,271 22,890 24,258 YoY Growth 2.0% -11.7% -5.7% 6.0% Rest of Europe 63,127 63,220 58,795 61,146 YoY Growth 1.5% 0.1% -7.0% 4.0% South/Central America & Caribbean 6,220 6,518 5,036 5,288 YoY Growth 12.6% 4.8% -22.7% 5.0% Asia & Australia 17,814 32,636 30,520 32,046 U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

20 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold Figure 19. Cemex Price Estimates (U.S. Dollars), E Cement (US$/ton) E 2010E Mexico YoY Growth 2.6% 1.7% -15.5% 9.2% USA YoY Growth 4.0% -2.2% 4.6% 0.0% Spain YoY Growth 18.8% 11.2% -13.3% -13.2% UK YoY Growth 16.6% -2.2% -18.2% 3.5% Rest of Europe YoY Growth 0.7% 24.5% -13.8% -1.1% South/Central America & Caribbean YoY Growth 19.6% 15.0% -15.6% 7.1% Africa and Middle East YoY Growth 1.0% 29.8% -4.8% 8.0% Asia & Australia YoY Growth 1.0% 15.3% -18.2% 8.7% Ready Mix (US$/ m3) E 2010E Mexico YoY Growth 2.5% 1.7% -18.1% 1.5% USA YoY Growth -1.0% 0.9% 1.6% 0.0% Spain YoY Growth 10.2% 11.8% -13.5% -13.2% UK YoY Growth 9.0% -4.0% -18.1% 3.5% Rest of Europe YoY Growth 0.0% 15.2% -13.6% -11.3% South/Central America & Caribbean YoY Growth 15.2% 10.2% -7.8% 0.0% Africa and Middle East YoY Growth 7.1% 35.9% -2.7% -1.2% Asia & Australia YoY Growth 175.8% 7.7% -10.1% 13.3% Aggregates (US$/ton) E 2010E Mexico YoY Growth 13.7% 4.7% -20.8% 0.9% USA YoY Growth 1.6% 13.1% 3.0% 3.0% Spain YoY Growth 12.6% 13.7% -12.1% -11.6% UK YoY Growth 5.4% -4.6% -18.2% -0.1% Rest of Europe YoY Growth 8.6% -1.5% -10.9% -11.5% South/Central America & Caribbean YoY Growth 24.7% 27.8% -3.2% 5.0% Asia & Australia YoY Growth 242.6% 13.3% -7.1% 5.0% 20

21 Figure 20. Cemex Revenue and EBITDA by Region (U.S. Dollars in Millions), E Sales E 2010E Mexico 3,829 3,822 3,062 3,415 USA 4,930 4,698 3,972 3,717 UK 2,033 1,712 1,290 1,451 Rest of Europe 4,173 4,369 3,370 3,187 South CA and Caribbean 2,024 2,023 1,289 1,416 Spain 2,120 1,573 1, Asia 1,255 2,055 1,717 1,980 Africa and Middle East 758 1, ,016 Eliminations Consolidated 21,673 21,689 17,101 17,327 Operating Income E 2010E Mexico 1,234 1,285 1,050 1,205 USA (32) 7 UK (66) (121) (147) (153) Rest of Europe South CA and Caribbean Spain Asia Africa and Middle East Eliminations and others (441) (385) (220) (249) Consolidated 2,971 2,487 1,918 2,168 EBITDA E 2010E Mexico 1,405 1,453 1,176 1,329 USA 1, UK Rest of Europe South CA and Caribbean Spain Asia Africa and Middle East Eliminations and others (237) (142) (64) (67) Consolidated EBITDA 4,586 4,343 3,487 3,658 EBITDA Margins E 2010E Mexico 36.7% 38.0% 38.4% 38.9% USA 22.7% 14.9% 15.3% 15.8% UK 4.6% 1.5% 1.8% 2.2% Rest of Europe 11.5% 12.2% 12.6% 13.2% South CA and Caribbean 33.6% 32.5% 32.9% 33.4% Spain 29.9% 29.5% 29.9% 30.1% Asia 19.0% 17.3% 17.7% 18.2% Africa and Middle East 23.1% 27.7% 28.1% 28.6% Consolidated -43.0% -38.8% -17.4% -18.0% Sources for Figures 18, 19 and 20: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

22 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold FINANCIAL STATEMENTS Figure 21. Cemex Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) Income Statement 2007 % 2008 % 2009E % 2010E % Sales 21, % 21, % 17, % 17, % Cost of Sales 14,441 67% 14,823 68% 11,595 68% 11,662 67% Gross Profit 7,232 33% 6,866 32% 5,505 32% 5,665 33% Oper. and Adm. Expenses 4,260 20% 4,379 20% 3,588 21% 3,497 20% Operating Profit 2,971 14% 2,487 12% 1,918 11% 2,168 13% Depreciation 1,615 7% 1,856 9% 1,569 9% 1,490 9% EBITDA 4,586 21% 4, % 3, % 3, % Financing Costs 119 1% 1,209 5% 1,043 6% 956 6% Interest Paid 807 4% 912 4% 1,117 7% 1,049 6% Interest Earned 79 0% 52 0% 56 0% 61 0% 22 Monetary Gain/Loss (631) -3% (37) 0% (44) 0% (37) 0% FX Gain/Loss 22 0% 386 2% 26 0% 5 0% Other Financial Operations 59 0% 3,270 16% 361 2% 284 2% Profit before Taxes 2,793 13% 3,270 16% 509 3% 963 6% Tax Provision 462 2% (2,113) -10% 137 1% 279 2% Profit after Taxes 2,331 11% 5,383 25% 371 2% 684 4% Subsidiaries 136 1% 4 0% 40 0% 70 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest 77 0% 5 0% 26 0% 11 0% Net Profit 2,391 11% 203 2% 373 2% 654 4% Balance Sheet 2007 % 2008 % 2009E % 2010E % Assets 49, % 45, % 46, % 45, % Short-Term Assets 5,608 11% 4,969 11% 5,011 11% 4,850 11% Cash and Equivalents 794 2% 990 2% 1,068 2% 1,167 3% Accounts Receivable 2,436 5% 1,881 4% 2,375 5% 2,157 5% Inventories 1,798 4% 1,627 4% 1,569 3% 1,527 3% Other Short-Term Assets 580 1% 471 1% 493 1% 505 1% Long-Term Assets 44,054 89% 40,319 89% 40,768 88% 40,635 88% Fixed Assets 24,010 48% 20,522 45% 20,060 43% 19,428 42% Deferred Assets 20,044 40% 19,797 44% 20,708 45% 21,207 46% Other Assets - 0% - 0% - 0% - 0% Liabilities 30,967 62% 28,130 62% 25,798 56% 24,051 52% Short-T. Liabilities 7,636 15% 11,122 25% 10,485 23% 10,205 22% Suppliers 2,167 4% 1,641 4% 1,590 3% 1,418 3% Short-Term Loans 2,704 5% 6,298 14% 6,317 14% 6,226 14% Other ST Liabilities 2,149 4% 2,548 6% 2,577 6% 2,561 6% Long-Term Loans 16,543 33% 12,215 26% 10,688 23% 9,308 20% Deferred Liabilities 6,787 14% 5,158 11% 4,626 10% 4,538 10% Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth 14,942 30% 13,769 30% 16,929 37% 18,309 40% Net Worth 18,695 38% 17,158 38% 20,475 44% 21,940 48% Minority Interest 3,753 8% 3,390 7% 3,546 8% 3,631 8% Cash Flow 2007 % E 2010E Net Majority Earnings 2, Non-Cash Items 1, ,684 1,580 Changes in Working Capital 157 (129) (5) 4 Capital Increases/Dividends (25) - (0) (0) Capital Expenditures (17,171) (28) (446) (796) Net Cash Flow 3,280 (66) Beginning Treasury 1, ,090 Ending Treasury ,106 1,198 Sources: Company reports and Santander estimates.

23 Figure 22. Cemex Income Statement, Balance Sheet, and CF Statement, E (Millions of Mexican Pesos) Income Statement 2007 % 2008 % 2009E % 2010E % Sales 236, % 243, % 240, % 239, % Cost of Sales 157,696 67% 166,214 68% 163,412 68% 161,412 67% Gross Profit 78,973 33% 76,987 32% 77,573 32% 78,401 33% Oper. and Adm. Expenses 46,525 20% 49,103 20% 50,515 21% 48,393 20% Operating Profit 32,448 14% 27,884 11% 27,058 11% 30,008 13% Depreciation 17,632 7% 20,822 9% 22,090 9% 20,615 9% EBITDA 50,080 21% 48,701 20% 49,148 20% 50,623 21% Financing Costs 1,299 1% 14,711 6% 14,745 6% 13,227 6% Interest Paid 8,809 4% 10,223 4% 15,753 7% 14,519 6% Interest Earned 862 0% 579 0% 786 0% 840 0% Monetary Gain/Loss (6,890) -3% (418) 0% (613) 0% (519) 0% FX Gain/Loss 243 0% 4,327 2% 391 0% 67 0% Other Financial Operations 649 0% 43,666 18% 5,118 2% 3,925 2% Profit before Taxes 30,500 13% (30,494) -13% 7,195 3% 12,856 5% Tax Provision 5,041 2% (23,562) -10% 1,943 1% 3,728 2% Profit after Taxes 25,458 11% (6,932) -3% 5,252 2% 9,128 4% Subsidiaries 97 0% 453 0% 1,487 1% 43 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest 134 0% 493 0% 908 0% 837 0% Net Profit 26,108 11% 2,278 1% 5,215 2% 9,064 4% Balance Sheet 2007 % 2008E % 2009E % 2010E % Assets 542, % 622, % 633, % 639, % Short-Term Assets 61,244 11% 68,278 11% 68,656 11% 67,421 11% Cash and Equivalents 8,671 2% 13,604 2% 14,634 2% 16,217 3% Accounts Receivable 26,605 5% 25,838 4% 32,533 5% 29,977 5% Inventories 19,631 4% 22,358 4% 21,490 3% 21,227 3% Other Short-Term Assets 6,338 1% 6,477 1% 6,756 1% 7,019 1% Long-Term Assets 481,070 89% 553,990 89% 558,528 88% 564,832 88% Fixed Assets 262,189 48% 281,975 45% 274,823 43% 270,055 42% Deferred Assets 218,881 40% 272,015 44% 283,706 45% 294,777 46% Other Assets - 0% - 0% - 0% - 0% Liabilities 338,161 62% 386,511 62% 353,439 56% 334,307 52% Short-T. Liabilities 83,388 15% 152,820 25% 143,638 23% 141,849 22% Suppliers 23,660 4% 22,543 4% 21,788 3% 19,711 3% Short-Term Loans 29,524 5% 86,540 14% 86,540 14% 86,540 14% Other ST Liabilities 23,472 4% 35,006 6% 35,310 6% 35,599 6% Long-Term Loans 180,654 33% 162,823 26% 146,419 23% 129,383 20% Deferred Liabilities - 0% - 0% - 0% - 0% Other Liabilities 74,119 14% 70,868 11% 63,382 10% 63,074 10% Majority Net Worth 163,168 30% 189,181 30% 231,925 37% 254,493 40% Net Worth 204,153 38% 235,756 38% 280,501 44% 304,965 48% Minority Interest 40,985 8% 46,575 7% 48,577 8% 50,472 8% Cash Flow E 2009E 2010E Net Majority Earnings 26,945 2,278 5,252 9,128 Non-Cash Items 16, ,072 21,961 Changes in Working Capital 1,713 (5,362) (104) 742 Capital Increases/Dividends (269) - (0) (0) Capital Expenditures (187,505) (374) (6,107) (11,070) Net Cash Flow 35,821 (879) 1,030 1,584 Beginning Treasury 18,493 8,671 13,604 15,147 Ending Treasury 8,671 1,484 15,147 16,659 Sources: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

24 Cemex: The Long and Winding Road Lowering Target and Reiterating Hold IMPORTANT DISCLOSURES Cemex 12-Month Relative Performance (U.S. Dollars) IPC CEMEX F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 Sources: Bloomberg and Santander. Cemex Three-Year Stock Performance (U.S. Dollars) SB $ /16/05 Cemex (L Axis) IPC (R Axis) 3,500 3,000 2, , B $ ,500 10/31/ B $34.00 B $42.00 H $ /13/06 8/22/07 3/27/08 1, D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 S-08 D-08 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review Source: Santander. 24

25 IMPORTANT DISCLOSURES (CONTINUED) Key to Investment Codes Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Buy Expected to outperform the local market benchmark by more than 10% % 65.63% Hold Expected to perform within a range of 0% to 10% above the local market benchmark % 21.88% Underperform/Sell Expected to underperform the local market benchmark. 9.14% 12.50% Under review 1.08% The numbers above reflect our Latin American universe as of Friday, February 6, For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2009 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 6.5% of equity risk premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) This research report ( report ) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment I, S.A. which is wholly owned by Banco Santander, S.A. ["Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Investment Bolsa, Sociedad de Valores, S.A. ( Santander Investment Bolsa ) and in the United Kingdom by Banco Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private customers. SIS, Santander London and Santander Investment Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Gonzalo Fernandez*. *Employed by a non-us affiliate of Santander Investment Securities Inc. and not registered/qualified as a research analyst under FINRA rules, and is not an associated person of the member firm, and, therefore, may not be subject to the FINRA Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Grupo Santander receives non-investment banking revenue from the subject company. Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Cemex. Within the past 12 months, Grupo Santander has received compensation for investment banking services from Cemex. In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from Cemex. The information contained within this report has been compiled from sources believed to be reliable. Although all reasonable care has been taken to ensure the information contained within these reports is not untrue or misleading, we make no representation that such information is accurate or complete and it should not be relied upon as such. All opinions and estimates included within this report constitute our judgment as of the date of the report and are subject to change without notice. From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly interested in, the securities, options, rights or warrants of companies mentioned herein. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2009